How much longer can the U.S. housing market grow at this amazing rate?

July 26, 2016

Nothing seems to stop the U.S. housing market. House prices continue to rise; demand is strengthening, and residential construction activity is also rising.

During the year to April 2016, the S&P/Case-Shiller seasonally-adjusted national home price index increased 5% (3.3% in real terms), slightly up from a y-o-y rise of 4.3% a year earlier, according toStandard and Poor’s. The seasonally-adjusted purchase-only U.S. house price index from the Federal Housing Finance Agency (FHFA) rose 5.9% (4.6% in real terms) y-o-y in April 2016.

All 20 major U.S. cities experienced relatively strong house price hikes, with Portland posting the highest increase of 12.32% during the year to April 2016, according to Standard and Poor’s. It was followed by Seattle (10.67%), Denver (9.45%), Dallas (8.65%), San Francisco (7.77%), Tampa (7.77%), Atlanta (6.51%), Miami (6.44%), and San Diego (6.34%).

The Pacific region had the highest house price increases (8.6%) during the year to April 2016, followed by the Mountain region (7.7%) and the South Atlantic region (7.1%), according to the FHFA.

The median sales price of new homes sold in the U.S. rose by 1% during the year to May 2016, to US$290,400, according to the U.S. Census Bureau.

Demand has been shooting up. New home sales rose by 17.9% y-o-y to Q1 2016, to 132,000 units, according to the U.S. Census Bureau, rising in all regions. Likewise, existing home sales increased 5.1% in March 2016, to an annualized 5.33 million units, according to the National Association of Realtors (NAR).

U.S. homebuilder sentiment in June 2016 was at 60, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) – the highest reading this year. A reading of 50 is the midpoint between positive and negative sentiment.

Construction activity is also rising. New privately-owned housing unit starts were up by 10.1% y-o-y during the first four months of 2016, while housing completions increased by 8.9%, according to the U.S. Census Bureau.

CoreLogic projects a 4% to 5% increase in its national home price index this year. NAR expects existing home sales to rise by 3% to 5.45 million in 2016, with the formation of 1.25 million new households.

The U.S. economy grew by an annualized 1.1% in the first quarter of 2016, after growth of 1.4% in Q4 2015, 2% in Q3 2015, 3.9% in Q2 2015 and 0.6% in Q1 2015, amidst weakening exports and investment caused by strong dollar and lower oil prices, according to the U.S. Bureau of Economic Analysis. The world´s largest economy is expected to grow by another 2.4% this year, at par with the growth rates seen in the past two years, according to the IMF.

The story of housing boom and bust

During the U.S. housing boom (1996-Q1 2006), all 20 main U.S. cities experienced spectacular house price rises. Los Angeles registered the biggest house price rise of 265.5%, followed by San Diego (247.7%), San Francisco (226.6%), and Miami (213.1%).

Then in Q2 2006, house prices started to fall.

The S&P/Case-Shiller composite-20 home price index plunged 33.8% from Q2 2006 to Q4 2011. Phoenix registered the biggest drop (-55.2%) among the twenty largest metro areas, followed by Miami (-50.5%), Detroit (-42.8%), San Francisco (-41%), Los Angeles (-40.7%), and San Diego (-39.7%).

Starting the second half of 2012, the U.S. housing market started to recover, led by Phoenix. All the 20 largest cities in the U.S., except New York, saw house price rises in 2012 from a year earlier.

The U.S. housing market grew stronger in 2013, with Las Vegas registering the biggest annual house price increase of 25.5%, followed by San Francisco (22.6%) and Los Angeles (20.3%).

House prices continue to rise in 2014, albeit at a much slower pace. The S&P/Case-Shiller composite-20 home price index rose by 4.4% in 2014 from a year earlier, lower than 13.4% y-o-y growth in 2013.

HOUSE PRICE CHANGE (%)

US Cities

Housing boom (Jan 1996 – Mar 2006)

Housing crash, global crisis (Apr 2006 – Dec 2011)

Housing recovery (Jan 2012 – Dec 2014)

2015
(y-o-y)

April 2016
(y-o-y)

New York

172.58%

-24.45%

8.77%

2.93%

2.60%

Los Angeles

265.49%

-40.06%

40.94%

6.00%

5.86%

Chicago

96.84%

-33.47%

17.40%

2.27%

3.10%

Phoenix

182.59%

-54.73%

43.80%

6.26%

5.50%

San Diego

247.66%

-39.68%

36.74%

7.04%

6.34%

Dallas

-

-7.53%

26.81%

9.52%

8.65%

San Francisco

226.59%

-40.82%

57.39%

10.35%

7.77%

Detroit

71.99%

-43.31%

37.86%

6.68%

5.74%

Boston

152.49%

-16.38%

18.32%

4.48%

5.71%

Seattle

134.22%

-23.97%

30.55%

9.74%

10.67%

Composite-10

192.25%

-33.52%

26.75%

4.95%

4.69%

Composite-20

-

-33.31%

27.82%

5.58%

5.44%

Source: S&P

Residential construction continues to rise

New privately-owned housing starts rose 1o.1% during the first five months of 2016 to 465,600 units, while completions were up 8.9% to 376,800 units, according to the U.S. Census Bureau. Building permits (private) rose by 1% y-o-y to 464,400 units during the first five months of 2016.

The average supply of existing homes was around 4.7 months in May 2016, a par with the previous month but down from 5.2 months in the same period last year, according to the NAR.

From 1990 to 2007, total housing completions averaged 1.5 million units per year, but crashed to 584,900 units in 2011. Residential construction started to recover in 2012, and by 2015 was back at 968,300 units.

Foreclosures and delinquency rates continue to fall

The delinquency rate on single-family residential mortgages fell to 4.84% in Q1 2016, down from 6.16% a year earlier and the lowest rate since Q2 2008, according to the U.S. Fed.

Distressed homes, i.e., foreclosures and short sales sold at discount prices, dropped to 9.9% of sales in March 2016, down 2.7% from a year earlier, according to CoreLogic. Maryland had the largest share of distressed sales of any state at 19.8%, followed by Connecticut (18.9%), Michigan (18.1%), Florida (17%) and Illinois (16.7%). In contrast, North Dakota had the smallest distressed sales share at 2.4%.

"More than one-third of the 216 local markets we analyzed were below their pre-recession foreclosure activity averages in the first quarter, and we would expect a growing number of markets to move below that milestone the rest of this year – while the number of markets with a lingering low-grade fever of foreclosure activity continues to shrink," said Daren Blomquist of RealtyTrac.

Home sales surge

New homes sold in the U.S. rose by 14.6% in 2015 to about 501,000 units, according to the US Census Bureau - the highest number of new housing units sold since 2008. In Q1 2016 there were 132,000 homes sold - up by 17.9% y-o-y.

The South accounted for 61% of new home sales transactions in Q1 2016, the West for 23%, Midwest for 11%, and Northeast for 5%.

"There cannot be too much wrong with the economy if consumers keep buying new homes. It shows confidence," said Chris Rupkey, chief economist at MUFG Union Bank in New York.

Existing home sales also increased 5.1% in March 2016, to an annualized rate of 5.33 million units, according to the National Association of Realtors (NAR). The Northeast had the biggest increase in of 11.1%, followed by the Midwest with a 9.8% increase.

"It points to a very strong start to the crucial spring selling season, and initial anecdotal indications point to this positive momentum being sustained in coming months," said Millan Mulraine, chief economist at TD Securities in New York.

Mortgage interest rates down despite Fed rate hike

Cheap mortgages continue to fuel demand. Average interest rates for both fixed and adjustable rate mortgages were even lower this year than last, according to figures released by Freddie Mac, even though the Fed Funds target rate was raised in December 2015 to 0.25%-0.50% after being held at 0%-0.25% for seven years.

The average interest rate for 30-year fixed rate mortgages (FRMs) fell to 3.57% in June 2016 from 4.05% a year earlier.

The average rate for 15-year FRMs dropped to 2.84% during the same period, from 3.19% in June 2015.

The average rate for 5-year adjustable rate mortgages (ARMs) declined to 2.78% in June 2016 from 2.99% last year.

Despite lower mortgage interest rates in 2015, the mortgage market has shrunk significantly from 100.1% of GDP in 2009, to 76.86% of GDP in 2015, according to the U.S. Federal Reserve System.

However mortgage debt outstanding rose by 2.9% y-o-y in the first quarter of 2016, according to the US Fed. One- to four-family residences accounted for more than 72% of the total amount of mortgage loans outstanding.

Rents rising strongly, vacancies down

Rising rents are another sign of the increasingly healthy U.S. economy. The median asking rent rose sharply by 8.9% to US$870 per month y-o-y to Q1 2016, according to the U.S. Census Bureau.

In the Northeast, the median asking rent rose by 4.2% during the year to Q1 2016, to US$960 per month.

In the Midwest, the median asking rent rose by 9.4% y-o-y to US$743 per month in Q1 2016.

In the South, the median asking rent rose by 11% y-o-y to US$846 per month in Q1 2016.

In the West, the median asking rent surged by 15.1% y-o-y, to US$1,097 in Q1 2016.

In the first quarter of 2016, the nationwide rental vacancy rate was 7%, slightly down from 7.1% in a year earlier, according to the U.S. Census Bureau.

The West had the lowest rental vacancy rate of 5.1% in Q1 2016, followed by the Northeast (5.4%), and the Midwest (7.7%). The South had the highest rental vacancy rate of 8.8%.

Median rents were more or less static from 2008 to 2014, according to the U.S. Census Bureau. Since 2015, rents have risen at least as fast as house prices.

Buyers priced out of the market

Homeownership has been falling for almost a decade in the U.S., due to rising property prices and tight credit standards. Homeownership in the U.S. was down to 63.5% of households in the first quarter of 2016, from a peak of 69% in 2004, according to the U.S. Census Bureau.

By region:

In the Northeast, the homeownership rate dropped to 60.4% in Q1 2016, from 61.1% a year earlier.

In the South, the homeownership rate dropped to 64.8% in Q1 2016, from 65.1% in the previous year.

In the Midwest, the homeownership rate rose slightly to 68.9% in Q1 2016, from 68.6% in the previous year.

In the West, homeownership rate improved to 58.7% in Q1 2016, from 58.5% a year earlier.

Unemployment is at an eight-year low

Unemployment in the U.S. was 4.9% in June 2016, down from 5.5% in the previous year, according to the Bureau of Labor Statistics (BLS). It is the lowest level since 2007.

There were a total of 287,000 jobs added in June, up from a meagre increase of 11,000 jobs the previous month. The additions came mostly from the healthcare and social assistance services (58,000 jobs), professional and business services (38,000 jobs), and the information sector (44,000 jobs).

The country’s unemployment rate averaged 5% from 1998 to 2008. Its recent peak year was 2010 with 9.6% unemployment.

In June 2016, average weekly earnings increased by 2.3% from the same period last year, to US$880.98.

Modest economic growth

The U.S. economy grew by an annualized rate of 1.1% in the first quarter of 2016, after growth rates of 1.4% in Q4 2015, 2% in Q3 2015, 3.9% in Q2 2015 and 0.6% in Q1 2015, amidst weakening exports and investment caused by the strong dollar and lower oil prices, according to the U.S. Bureau of Economic Analysis.

Despite this, the U.S. economy grew by 2.4% last year, matching its pace in 2014.

The world´s largest economy is expected to grow by 2.4% this year, and by 2.5% in 2017, according to the IMF.

However, the U.S. is vulnerable to global economic turmoil. “Greater uncertainty about the prospects for global growth and increased financial market volatility could make U.S. businesses more cautious in hiring and investing, and could make consumers less willing to spend,” said Gus Faucher, deputy chief economist at PNC.

Last year’s budget deficit was the lowest deficit in eight years, at an estimated 2.5% of GDP, down from 2.8% of GDP in 2014, according to the Congressional Budget Office (CBO) - and down from 10.1% of GDP in 2009. But for the full fiscal year, the federal government’s budget deficit is expected to increase to 2.9% of GDP, according to the CBO.

Inflation stood at 1% in May 2016, according to the US Bureau of Labor Statistics. Overall inflation is expected to be 0.8% this year, almost unchanged from a year earlier, according to the IMF.

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